Freddie Mac has raised concerns that appraisal values are more likely to come in below the contracted sales price in Black and Latino neighborhoods than in those that are prominently white. That’s according to an analysis of 12 million appraisals for purchase transactions on single-family homes submitted to it between 2015 and 2020.
From the analysis, it was found that almost 13% of homes in predominantly Black areas received appraised values that were lower than the contract price, compared to just 7.4% of homes in white areas. In areas where Latinos are the majority, 9.4% of appraisals came in lower.
Freddie Mac’s researchers said the difference in comparable sale differences, variances in comparable sales prices and possible systemic overpayment for homes by minorities explains just a “modest amount” of the observed appraisal gaps for minority tracts.
The report notes that there may be some benefit to the appraisal falling short of the contract price, as it sometimes means the buyer can negotiate a lower price.
But in most cases, it means “families might miss out on the full wealth-building benefits of homeownership or may be unable to get the financing needed to achieve the American Dream in the first place,” said Michael Bradley, senior vice president of modeling, economics, data science and analytics in Freddie Mac’s single-family division. “Our research marks the beginning of a comprehensive effort to better understand the key drivers contributing to the appraisal gap.”
Going forward, Freddie Mac plans to focus on possible solutions, including altering appraisal best practices, uniform standards for automated valuation models and enhanced consumer disclosures. They might also recommend revising fair lending examination procedures and risk assessments, Bradley said.